Texas: Post-Bust Mortgage Laws Produce a Loan Star State

CUTLINE: Texas Tech FCU's headquarters are located in its own building on three leased acres of the Tech campus. University officials required the building to mirror the Spanish Renaissance design of other campus buildings. The credit union is in the process of building its first off-campus branch on the south side of Lubbock, and will relocate its mortgage operations there and provide full branch service to members when it opens early next year.

They say everything is bigger in Texas, but one thing that wasn’t – the real estate boom and subsequent bust – has worked out for credit unions in a big way.

According to the NCUA’s second-quarter statistics, homes in the Lone Star state have gained nearly 5% in value from the real estate boom’s peak.

Rick Grady, vice president of communications for the Texas Credit Union League, said laws in Texas that resulted from the savings and loan industry implosion in the 1980s keep mortgage loans below home values and shielded the state from the mortgage bust.

General Motors is currently spending $530 million on the second phase of an expanded truck and SUV plant in Arlington that will be one of GM’s largest, according to the Fort Worth Star-Telegram.

Grady said unemployed auto workers from Michigan and Ohio have relocated to fill the jobs, and other companies have relocated headquarters and workers to Texas to take advantage of low corporate tax rates and no state income taxes.

As of June 30, Texas credit unions reported 86 basis points of ROAA, with just 0.9% delinquencies despite a 12-month loan growth rate of 5.8%.

During the first six months of this year, Grady said Texas credit unions booked $12.1 billion in new loans, picking up a net gain of $2 billion. Used car loans are still hot, and due to aging vehicles on the road, “people are going crazy on the new car lots” too, he said.

First mortgage activity in the state is on pace this year to double that booked during 2011, Grady said. Last year’s numbers weren’t bad, either: Texas experienced a refinancing boom in 2011 like other states did.

A recently discovered oil field in the southern tip of Texas has drawn workers from around the country, the TCUL spokesman said. Increased production in the Midland-Odessa area in West Texas has that area booming, too.

Donna Neal, president/CEO of the $255 million My Community FCU in Midland, is riding the gush of new money, reporting nearly 20% loan growth to the NCUA as of June 30, with just 0.18% delinquencies and 0.37% charge offs. Fee income of 1.92% has contributed to the bottom line as well. My Community reported 0.95% for the second quarter.

Neal took the corner office at My Community three years ago after heading up lending at ViewPoint Bank, which converted from a credit union charter in 2005. She has made expanding the credit union’s loan division a priority, beefing up staffing, controls and oversight with an emphasis on prudent lending.

She said the consumer lending spigot turned on eight months ago and has driven loan growth. Indirect auto lending through select dealers has been a success, and motorcycles, RVs, credit cards and credit lines outstanding have also grown.

It’s a good thing loan business is brisk, because deposits are flooding in too, despite an effort to keep dividends low to discourage new money. My Community’s loan-to-share ratio as of June 30 was 55%, down from 58% one year prior.

Net worth is 10.29% but Neal has no intention of leveraging it to grow faster. Despite forecasts the energy sector could remain strong for 30 years, she said “things will turn eventually, and we’ll need some of that padding.”

The 25,000-member credit union has four branches in Midland but just one in Odessa. Neal recently formed a committee to research how best to expand in Odessa, and plans to spend some capital to increase My Community’s physical presence there.

Expansion into mortgages is expected next year – My Community recently gained access to the secondary market, the only lender in the area to do so, Neal said. Member business loans are also on the horizon.

Meanwhile, the San Antonio-based Security Service FCU, the largest credit union in the state with $6.7 billion in assets, is also brimming with loans. Twelve-month loan growth as of June 30 is over 10%, and the second quarter’s 99 basis point return on assets is fueled by a nearly 105% loan-to-share ratio.

John Worthington, senior vice president for corporate communications, said although the credit union’s loan and investment yields and fee income is below peer levels, operating expenses are also low – 2.62% of average assets.

Security Service was one of the first indirect auto lenders in the industry, starting in 1990 and growing to become the largest credit union indirect lender in the country according to Callahan and Associates.

Mergers expanded the Texas cooperative’s presence into Utah and Colorado, and 900,000 members are served by with 70 branches in the three states.

How does such a large operation keep operating expenses so low? Worthington said efficiency and innovation are part of the corporate culture, driven from the top down. Employees are encouraged to suggest operational changes that could cut costs and/or improve efficiency.

Five core values – caring, innovative, honest, fair and dedicated – are so well integrated into staff they use the terms in correspondence, he said. The San Antonio Express News named the credit union an “outstanding place to work” for the second year, a designation Worthington said was determined by employee feedback gathered from a third party.

Lubbock, a city of 230,000 located in the northwest part of the state, doesn’t have booming oil fields or expanding manufacturing plants. Instead, higher education and cotton are the area’s top industries. Texas Tech University, with 32,600 students, is growing and graduates are finding jobs, particularly those with engineering and nursing degrees, and many are choosing to stay in Lubbock after graduation.

“Even the law school graduates are finding good jobs,” said Ellen Hein, president/CEO of the $85 million Texas Tech FCU.

TTFCU reported 99 basis points of ROAA as of June 30, more than twice the profit its peers earned. Twelve-month loan growth was 13.41% as of mid-year, and delinquencies are low, at 0.45% with charge offs are much lower, only 0.13%.

Despite the healthy economy and growth in the education sector, Hein said maintaining the credit union’s 83% loan-to-share ratio hasn’t been easy.

“We used to have about 50% of our loan portfolio in student loans, but when the direct program was taken back by the government, we knew we had to get something else on the balance sheet,” she said.

Government-backed student loans had the disadvantage of low interest rates, which had driven the credit union’s net interest margin down to around 2%.

The answer has been real estate lending. Mortgages were introduced two years ago and have taken off in the last year, and TTFCU has also built a niche market in second mortgages, Hein said, “cherry picking” borrowers with scores above 730.

Home lending in Texas is restricted to 80% loan to value, and it shows in real estate loan loss figures at TTFCU; the credit union hasn’t had a foreclosure since 1997, Hein said.

The credit union was among those receiving offers of a fast and painless low-income designation approval process this year. Hein said she initially thought she would decline, but realized the benefit of accepting non-member deposits opened membership up to the entire community, which is expected to boost mortgage lending further.

“We did some things right, we were in the right place at the right time, and Texas is a great place to run a credit union,” Hein said.